If you're looking for a certain amount of dividend income from a stock, you'll need to know how many shares of it you'll have to own. Let's go through an example to review how the math works. Say you want to collect $1,000 in dividend income annually from stock in Cisco Systems (CSCO -0.62%).
As of June 5, Cisco paid out $0.40 per quarter per share or $1.60 per year -- and its dividend yield was 3.5%. A company's dividend yield is its current annual dividend amount divided by its current stock price. In other words, it can be represented as a fraction, with the dividend amount on top and the stock price on the bottom. (In Cisco's case, it's $1.60 divided by the recent stock price of $46, which is 3.5%.) Since stock prices fluctuate daily, a company's dividend yield will also fluctuate -- so don't be surprised if Cisco's yield is 3.3% or 3.6% if you look it up today.
But let's go with 3.5%. Since you want to collect $1,000, you'll divide $1,000 by 3.5%, or 0.035, and you'll get $28,571 -- which is the total value of Cisco Systems shares you'll need. Divide $28,571 by the recent share price of $46, and presto -- the answer is 621. You'll need to buy about 621 shares of Cisco Systems stock in order to collect $1,000 annually in dividends.
You'll likely collect more than that over time, though, because healthy and growing dividend-paying stocks tend to increase their payouts -- often annually. Over the past decade, for example, Cisco's dividend has grown at an average annual rate of 8%. (That beats inflation, by the way.)
If Cisco's dividend continues to grow by 8% over the coming 20 years, its current annual payout of $1.60 will become $7.46. If you still held 621 shares, you'd be collecting $4,632 for the year. Dividends can be real wealth builders -- especially if you reinvest your dividends in more shares of stock. Many good brokerages allow you to do so.
